Question

Mannisto, Inc., uses the FIFO inventory cost flow assumption. In a year of rising costs and prices, the firm reported net income of $262,952 and average assets of $1,590,420. If Mannisto had used the LIFO cost flow assumption in the same year, its cost of goods sold would have been $32,360 more than under FIFO, and its average assets would have been $33,860 less than under FIFO.

Required:

a. Calculate the firm's ROI under each cost flow assumption (FIFO and LIFO).

b. Suppose that two years later costs and prices were falling. Under FIFO, net income and average assets were $302,242 and $1,871,390, respectively. If LIFO had been used through the years, inventory values would have been $43,670 less than under FIFO, and current year cost of goods sold would have been $15,890 less than under FIFO. Calculate the firm's ROI under each cost flow assumption (FIFO and LIFO).

Answer 1

Solution a:

Firm's ROI = Net income / Average assets

ROI under FIFO assumption = $262,952 / $1,590,420 = 16.53%

Net income under LIFO Assumption = $262,952 - $32,360 = $230,592

Average assets under LIFO assumption = $1,590,420 - $33,860 = $1,556,560

ROI under LIFO Assumption = $230,592 / $1,556,560 = 14.81%

Solution b:

ROI under FIFO assumption = $302,242 / $1,871,390 = 16.15%

Net income under LIFO Assumption = $302,242 + $15,890 = $318,132

Average assets under LIFO assumption = $1,871,390 - $43,670 = $1,827,720

ROI under LIFO Assumption = $318,132 / $1,827,720 = 17.51%